With $116 billion in his pocket, Warren Buffett could afford almost any S&P 500 company he wants.
And the investor who soured on airlines in the early 1990s wouldn’t rule out buying one of them today, he told CNBC’s Becky Quicky during a three-hour interview just days after his company, Berkshire Hathaway, reported that profit nearly doubled last year.
The growth drove the amount of cash on the company’s books up 34 percent from the $86.4 billion at the end of 2016, and the 87-year-old CEO told investors in his annual letter that he and Vice Chairman Charlie Munger are eager for a productive investment as the money is earning only a “pittance” in returns.
“We will need to make one or more huge acquisitions,” wrote Buffett, whose last outsize purchase was the $36 billion acquisition of aerospace parts-maker Precision Castparts in 2016.
For not much more than that amount, Berkshire could likely buy any of the four largest U.S. airlines: None has a market value above $38 billion, excluding debt. Counting it, the highest valuation is $46 billion for American Airlines, which merged with US Airways in 2013 after a bankruptcy.
Whether Buffett would want to make that kind of investment in the industry — even though Berkshire, as of Monday, is among the five biggest investors in American, Delta Air Lines, United, and Southwest — is another question.
The industry is nothing like that of rail lines, in which Buffett became a player in with Berkshire’s acquisition of Burlington Northern in 2010.
“You can’t build a new railroad from Omaha to Chicago tomorrow, but you can add a flight if you’re one of the airlines already there, or you can come in and get a gate and add a flight,” he said. “It’s a business that’s always subject to somebody doing something very different competitively.”
Indeed, “suicidally” fierce rivalries in the past sometimes wiped out earnings for the airlines, Buffett noted, though that was more common before a wave of consolidation that narrowed the playing field from seven major carriers to just four. Delta bought Northwest in 2008, and United merged with Continental in 2010.
“It’s really hard to know for sure how it will develop,” he said. “It’s not risk-free in terms of competition at all.”
Berkshire’s airline holdings are currently valued at $10.2 billion. The S&P 500 index tracking the industry in the U.S. closed 2.5 percent higher after Buffett’s comments on Monday, its biggest gain in about two weeks.
Buffett, of course, isn’t limited to buying airlines. There are plenty of other S&P 500 companies well within Berkshire’s price range: Ninety percent of them have a market value of less than $100 billion, though he views most of the ones the company considered buying last year as overpriced.
The challenge, said analyst Cathy Seifert of CFRA Research, is that Berkshire is increasingly competing with private-equity firms that are willing to saddle a target firm with debt and cash out on a quicker timetable.
“That, and valuations above where Berkshire thinks they’re attractive, have impeded their ability to do that blockbuster deal,” she said. “There’s the spoken and the unspoken. The spoken is, ‘We’re not going to overpay, and we’re going to be prudent in our use of leverage.’ The unspoken is, ‘We’re facing increased competition from private-equity firms, and that’s going to have an impact.'”
